Does Evergrande Represent Chinas Lehman Brothers Moment?

Updated: September 15th, 2021 08:40 PM IST

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Does Evergrande Represent Chinas Lehman Brothers Moment?

The global markets are on a high given the fiscal stimulus and central bank profligacy. Since March 20 fiasco, market is making daily new highs in less than one and a half year without caring about the events looming all around the globe. During this euphoria, certain markets too have entered into bearish zones. But the overall rejoice remains unaffected and at global level, the indices are in the spree to make all time highs. For last 8 months, no major correction has happened and phases of upward trend continued to march towards infinity irrespective of the slow recovery path of economy globally, burgeoning inflation numbers, slowing credit growth etc. However, since the month of June 21, certain credit events have risen globally whose potential domino impact is worth to be analysed. So let us analyze those Global events in detail:

Real estate is a key driver of Chinese economy since last decade. The constant soaring housing prices provoked people in China to even hold 3 to 4 houses per family. The best part about real estate is the consumption effect and credit expansion. Real estate is major driver for more than 60 industries like Cement, Steel, Chemical etc. Further  it enhances the credit expansion in the economy. The loans given to buy those real estate results in credit expansion which ultimately enhances the cycle of economy with constant rotation of money.

China’s housing bubble currently reflects the one in U.S. housing in the 2005-2008 U.S. property boom, where at a point of time $900 billion a year were being invested in residential real estate. In last 12 months, about $1.4 trillion was invested in Chinese housing. The total value of Chinese homes and developers’ inventory touched $52 trillion in 2019, (according to Goldman Sachs), which is twice the size of the U.S. residential market and exceedingly even the entire U.S. bond market size.

In March 2021, 288 apartments in a new Shenzhen property development sold out online in less than eight minutes. A few days later, buyers snapped up more than 400 units in a new housing complex in Suzhou. In Shanghai, apartment resales neared a record high in April, by one estimate. In the month of May 21, nearly 9,000 people each put down a deposit of one million yuan ($141,300) to qualify to buy apartments in a Shenzhen development. Imagine the kind of Euphoria created in Chinese real estate market. With the fears of Global slowdown, Chinese middle class started considering real estate as safe heaven. But like with every rose, thorns are always attached, the same scenario started into nightmare. The initial data released in 2018 stated that more than 50 million apartments were vacant in China and out of those vacant homes, roughly 21% were from Urban cities.

Since then, the number was only increased, and according to China Household Finance Survey, there are now 65 million empty units. Among families who owned two properties, the vacancy rate reached 39.4%, and among those that owned three or more, 48.2% were empty.

The record number in vacant units has meant little upward pressure on rents; in fact, Chinese rental yields are below 2% in major cities like Beijing, Shanghai, Shenzhen and Chengdu.

China’s push to wean property developers from excessive borrowing is spilling over into loan losses at banks and pain in credit markets as cash-strapped builders fall into distress, raising the risk of fallout rippling across the economy. Debt and land-buying curbs and hundreds of new rules are hitting developers far harder than they had expected, setting off a scramble to sell assets as well as a steady drumbeat of bankruptcies, defaults and cut-price takeovers. The regulatory push is the latest in years of efforts to reduce risks in the real estate sector. Let us look into some famous real estate Developers and the size of Liabilities.

As Evergrande has been downgraded by Moody’s and Fitch, the contagion risk is visible to whole of Chinese credit market. Further, the settlement mechanism of most of the real estate developer is though giving underdeveloped properties to get rid of liabilities as on date.

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